This is what's holding Chicago's health care sector back

Chicago has the potential to become the nation's "pre-eminent hub for health care disruption and innovation," but is being held back by political and budgetary impasses, the poor health of the city's low-income population and a fractured health care system.

The report also finds that Chicago's health care finance firms have a vast pool of capital that could fund start-ups. The region's conservatism and the risk aversion of large provider systems are slowing the growth of new health care companies, however.

Seven of the country's 12 health-care-focused private-equity firms are based in Chicago. The report estimates that these PE firms raised roughly $4.4 billion from 2014 to 2016. But they are still holding $1.75 billion in unallocated capital, "which could continue to bolster lower middle market health care businesses in the city."

"We believe that there is an incredible future for this city that can be realized through a common understanding of what makes us great and collaboration that advances our individual and collective interests," said David Smith, co-author of the report and a principal in consultancy Leavitt Partners.

The report documents the extent of the region's asset base in health care: a huge system of doctors and world-class hospitals, medical research, medical education, biotechnology and pharma sectors, device businesses, professional association headquarters, intellectual property, digital health and health IT, plus the venture-capital and private-equity firms that make their home here.

This host ecosystem is "robust and has incredible potential," Smith said in an interview, "but it's fragile. It has to have cooperation between policymakers and business leaders. It must advance not only business interests but advance the social and economic interests of the city as well."

The asset base needs to be reconciled with the health challenges that some neighborhoods face, and also to the fiscal shortcomings of the city and state.

OBSTACLES

The 65-member council, comprising companies and organizations from all sectors of Chicago's health care scene, is looking at ways to stabilize the individual insurance market in the region and set Medicaid on a sounder footing. "It's been difficult for managed care organizations to plan and understand the implications of their participation in the Medicaid program," Smith said. Likewise, it has been tough for providers who service low-income patients to plan and build for the future. A stronger public-private partnership would be helpful here, he said.

The other pall over the city is unfunded public liabilities. "It's on the business community's minds," Smith said. "How does that have an impact on bringing talent into the city? How does it affect companies that want to move here? We need to think about the climate we are creating, whether that could attract more assets or chase these assets away to other markets."

Chicago "has a unique position in the health care industry, given the volume and quality of health care expertise in the region," said Steven Collens, the other co-author and CEO of health care technology incubator Matter, based at the Merchandise Mart. "The big companies, health systems, universities and investors—we are really positioned to lead in improving health and health care nationally, not just in the region."

One of the stumbling blocks to growth of the sector has been "a lack of connective tissue," Collens said in an interview. Matter and the new council, he added, are intended to supply some of that need.

The 31-page report highlights the area's strengths in five key areas:

• A strong presence of private-equity and venture-capital firms, and a reputation as second-best city in the country for start-ups.

• Plenty of co-working spaces, incubators and accelerators (such as Matter and the Polsky Center at the University of Chicago) throughout the city, as well as corporate partners seeding innovation.

• A big and broad​ diversity of health care industry expertise in all industry sectors.

• Six medical schools and a vocational training infrastructure that pumps talent into the Chicago labor market.

• Unique collaborations among stakeholders to identify new investment and partnership opportunities.

Health care plays a major role in Chicago's overall economic development strategy, said Mayor Rahm Emanuel in a short speech before 100 attendees at Matter this morning. Building on the region's strategic advantages in talent, training, and transportation, Chicago's "unique strength in health care" contributes $69 billion in economic output. "In every aspect of provider and patient and payment, Chicago is a leader," he said.